Brexit and Trade Finance
By Rebecca Harding, Co-Founder and CEO, Equant Analytics
There is a lot we don’t know about Brexit, the most unknown of which is what trade and trade finance will look like after the United Kingdom leaves the European Union.
What we do know is that trade itself has changed over the past five years; supply chains have become shorter, and, as a result, global trade has ceased to grow at two times the rate of gross domestic product (GDP).
This forms the backdrop to the Brexit negotiations - trade has slowed, monetary policy is still loose and, as a result, trade finance is having to adapt. This has three consequences.
First, for banks, the problem is that the macroeconomic, specifically monetary, environment has put pressure on yields. Although liquidity is high, the yields on trade finance are low, and as regulations have tightened, this has put pressure on banks to - in the words of one trade-finance professional with whom I spoke recently - “get more out of less”.
In other words, existing large corporate relationships that are high value, low risk and fully understood are more likely to meet Basel III and KYC/AML (know your customer/anti-money laundering) considerations, with the result that emerging economies and SMEs (small and medium-sized enterprises) are increasingly squeezed out of the sector.
Second we know is that trade finance is a big market, but it, too, is changing. Globally, bank-intermediated trade finance (BITF) is worth around $6.7 trillion. However, for the last five years, according to SWIFT (Society for Worldwide Interbank Financial Telecommunication) and the ICC (International Chamber of Commerce), the letters of credit (LC) market has declined, particularly in Africa, where the risks around AML and KYC are seen as greatest.
Digitisation and alternative finance have not dented the traditional market as such but have provided a means for improving efficiency and “reaching the parts that banks cannot reach”, in the words of one senior banker. The net effect, however, has not been to increase trade finance but rather to provide mechanisms for de-risking and providing finance to tighter markets.
Third, these changes should be the backdrop to the negotiations around financial services and trade during the Article 50 process but won’t be discussed in all likelihood until the terms of the divorce settlement are reached. The future of trade, including the future of financial services, is not going to be part of the negotiations, but across Europe and beyond, trade and its finance is changing so much that it should at least be considered every step of the way.
It is no longer sufficiently precise, because of the way in which global trade is shifting, to talk about supply chain finance as a discrete product in its own right.
Digitisation means that banks are, effectively, global suppliers of liquidity and alongside that, are increasingly providing systems integration and guarantees between different actors across the supply chain - on one level facilitating invoice finance at the bottom of supply chains, providing digital platforms to integrate legal and compliance systems as well as swifter (pardon the pun) trade finance and ultimately building relationships with corporate clients.
This complexity is only set to increase as the Brexit terms become clearer and by then, it is likely that companies, banks and technology will have changed current trade finance beyond recognition.
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